Why Filing Early Makes Sense
Even though many taxpayers file their tax returns on or about April 15 (except during the pandemic), there is no need to put it off until the last minute. Indeed, filing an early tax return can make sense for a variety of reasons.
The Internal Revenue Service (IRS) opens the 2021 filing season, for 2020 taxes, at the end of January 2021. The IRS says it issues most refunds within 21 days. However, filers claiming the Earned Income Tax Credit or Additional Child Tax Credit may not receive a refund until the first week of March 2021, so long as direct deposit is the selected refund delivery method and nothing else is identified to be wrong with the return.
Even if you don’t file early, there are reasons to begin preparation as soon as you can. For starters, it gives you the time you need to collect the evidence you need to claim all of your deductions. You will avoid the headache of the middle-of-the-night stress over figures and receipts. If you use a paid preparer, your accountant will have a more flexible schedule and will be able to start working on your accounts sooner. Also, by filing early you will likely short circuit would-be identity thieves.
- Early filing gets you a faster refund.
- Lack of rushing gives you time to avoid mistakes that could lead to an audit.
- Tax planning before December gives you time to estimate capital gains, harvest tax losses, make last-minute charitable deductions, and shift some deductible items to the most useful tax year.
New Standard Deduction
One of the most important decisions taxpayers have to make is whether to take the new, larger standard deduction, increased for tax year 2018 and later by the Tax Cuts and Jobs Act (TCJA), or itemize deductions. Single filers and married taxpayers who file separately can claim a $12,400 standard deduction for 2020 (it goes up to $12,550 for 2021). For married couples filing jointly the standard deduction is $24,800 in 2020 ($25,100 in 2021). Heads of the household get a deduction of $18,650 in 2020 ($18,800 in 2021). The sooner you begin working on your tax return, the sooner you will be able to decide which method is right for you.
SALT Tax Deduction Limit
The TCJA also limits your total state and local tax deduction (SALT) to $10,000. This limit may provide further incentive to take the standard deduction if your SALT deduction is typically more than the new limit and you don’t have a whole lot of other deductions. Getting a head start on your taxes will help you avoid an unforeseen error when it comes to this important part of your tax return.
A Faster Refund
Avoid procrastination, give yourself peace of mind, and check this important item off your new year’s to-do list. Once the IRS says it will begin processing returns, why not turn yours in and get this unpleasant task over with?
For the 2020 filing season through October 2020, the IRS had issued refunds to 123.4 million filers, at an average of $2,476 per refund. If you have money coming to you, there’s no reason to let the government keep it longer than necessary. Filing sooner means a faster refund, because the IRS won’t be as busy early in the tax season as it will be in April.
Some people count on their income tax refund to pay major bills. Filing early puts the money in your hands sooner and may help you avoid taking out an expensive short-term loan to cover those expenses, especially if you’re still paying off your holiday bills.
Prevent Identity Theft
The sooner you file, the less time there is for an identity thief to file “for” you—and take your refund. This could lead to all sorts of mayhem, especially if the thief claims false deductions, fails to report income, or otherwise taints a tax return in your name. Fixing a mess like this can take months.
Filing early makes you much less vulnerable to identity theft; you file before thieves can step in and file “for” you.
No Crowds and No Penalties
If you are someone who mails in your tax return, filing early avoids congestion and a crowded post office. Better to get it done and avoid the hassle.
Filing early gives you time to understand fully any changes to tax law or deal with changes in your life that may alter your filing status. Mistakes from rushing at the last minute can trigger audits that can lead to penalties and interest. Given changes brought on by the TCJA, this point is more important than ever.
Access to Preparer and Information
Your certified public accountant (CPA) or other tax preparer will not be as busy in January or February as in April. Early access means your CPA will have additional time to consider your situation more carefully and help you with your return.
If you are in the process of buying a home or going back to college, it will require information from your recent tax returns. Preparing your taxes early will provide you with the most up-to-date information available.
Avoid Amended Returns
Starting early gives you the time to file an accurate return. An inaccurate return will likely become an amended return. Amended returns invite audits. Here are some things to watch out for as you pursue accuracy.
Mistakes in Official Documents
Check all incoming statements, including W2s, 1099s, interest statements, and anything used to justify a deduction. Companies, banks, and financial institutions make mistakes. Catch them before you file.
Forms That Arrive Late
Tax-Law Updates Not Reflected in Forms
Legislation passed before April 15 may not be incorporated into paper tax forms or tax software that has not been updated. Watch the news. Be on the lookout for changes that might have been missed. If necessary, you can file an amended return.
For example, for tax year 2017 private mortgage insurance (PMI) was not initially an allowable itemized deduction. On Feb 9, 2018, a tax law reinstated the deductibility of PMI for taxpayers with less than $100,000 in taxable income. By that point, the Form 1098, Mortgage Interest Statement, had already been mailed to taxpayers by their lender. After the tax law change, an amended Form 1098 had to be sent out by lending institutions. Qualifying taxpayers who had already filed taxes needed to file an amended return to include the additional deduction.
If you do have to amend your return, don’t correct only the things that are to your advantage. Correct anything that is wrong.
As a result of the TCJA, even the layout of the Form 1040 has changed. In fact, if you previously used the 1040EZ or 1040A, those forms were eliminated, starting with 2018. You can use your simplified 2019 return as a template for 2020. And if you're a senior and qualify, 2019 and later brings the new senior tax form, 1040-SR.
Shifting Tax Burdens
If you take that head start before Dec. 31, you will have time to estimate capital-gains distributions, harvest losses, contribute to a 529 savings plan or make last-minute charitable contributions. You can also take advantage of the opportunity to shift deductible items—such as property taxes, business expenses, or even mortgage payments—to whichever year makes the most sense tax-wise.
You can still maximize contributions to a company 401(k) and/or any individual retirement account (IRA) plans you have and make deposits to your health savings accounts until April 15 of the year following your tax return date (April 15, 2021, for your 2020 taxes).
Time to Save
If you owe the IRS, filing early gives you time to save up the money. Remember, you don’t have to pay until the filing deadline. Waiting only to find out that you owe more than you expected could put a real crimp in your budget. The IRS suggests reviewing your withholdings and tax payments in the final quarter of the year in order to avoid a surprise tax bill.
It is especially important to review your withholdings in 2020, because you may need to modify due to a change in circumstances brought on by the coronavirus pandemic.
The IRS has a new Tax Withholding Estimator tool, so you can ensure you're withholding accurately.
The Bottom Line
Most experts agree that it’s best to at least start your return as early as possible. The decision to file early may depend on the complexity of your return if you are receiving a refund. Follow the advice of your financial or tax advisor to make sure your return is accurate and complete.